CHAPTER 10
1.Though this was the supposed defense, as we noted earlier, even this defense was questionable. The oligarchs did not use the funds to finance Yeltsin’s reelection. But they did give him the organizational basis (and the TV support) he needed.
2. The transition countries governed in 2002 by former Communist parties or leaders were: Albania, Azerbaijan, Belarus, Croatia, Kazakhstan, Lithuania, Moldova, Poland, Romania, Russia, Slovenia, Tajikistan, Turkmenistan, and Uzbekistan.
3. For details, see M. Du Bois and E. Norton, “Foiled Competition: Don’t Call It a Cartel, But World Aluminum Has Forged a New Order,” Wall Street Journal, June 9, 1994. This article noted the close relation between O’Neill and Bowman Cutter, at that time Clinton’s deputy director of the National Economic Council, as instrumental in order to “cook” the deal. The sweetener for the Russians was an equity investment worth $250 million, guaranteed by the OPIC. The American aluminum executives did everything to take care of the appearances in order to avoid antitrust prosecution, and the American government included three antitrust lawyers to draft the agreement, which, according to this article, was carefully vaguely worded in order to satisfy the Justice Department.
In 1995, this cartel started to fall apart with the increase in world demand for aluminum and the difficulties of enforcing the cartel agreement with the Russian producers—see S. Givens, “Stealing an Idea from Aluminum,” The Dismal Scientist, July 24, 2001. In addition, Alcoa and other American aluminum producers were sued for conspiring to restrain trade; but the case was dismissed in courts—see J. Davidow, “Rules for the Antitrust/Trade Interface,” Miller & Chevalier, September 29, 1999, at www.ablondifoster.com/library/article.asp?pubid=143643792001&groupid=12. For an editorial expressing an opinion similar to that here, see Journal of Commerce, February 22, 1994.
The story does not end there: in April 2000, news emerged about how two Russian oligarchs (Boris Berezovsky and Roman Abramovich) were successfully forming a private monopoly to control 75–80 percent of the Russian yearly production, creating the second largest aluminum company in the world (after Alcoa). See “Russian Aluminum Czars Joining Forces,” The Sydney Morning Herald, April 19, 2000, and A. Meier and Y. Zarakhovich, “Promises, Promises,” Time Europe 155(20), May 22, 2000. See also, R. Behar, “Capitalism in a Cold Climate,” Fortune (June 2000). Despite accounts to the contrary, Boris Berezovsky vehemently denied any wrongdoing in relation to Russia.
CHAPTER 11
1. In the New York Times, Kolodko wrote: “But there was another, equally important facet of our success. Poland did not look to the international financial community for approval. Instead, we wanted Polish citizens to go along with these reforms. So salaries and pensions were paid and adjusted for inflation. There were unemployment benefits. We respected our own society, while doing tough negotiating with international investors and financial institutions.” George W. Kolodko, “Russia Should Put Its People First,” New York Times, July 7, 1998.
2. Poland also showed that one could maintain state ownership of the assets and not only prevent asset stripping but actually increase productivity. In the West, the largest gains in productivity were associated not with privatization, but with corporatization, i.e., imposing hard budget constraints and commercial practices on enterprises while they still remained state-owned. See J. Vickers and G. Yarrow, Privatization: An Economic Analysis (Cambridge, MA: MIT Press, 1988), chapter 2, and J. Vickers and G. Yarrow, “Economic Perspectives on Privatization.” Journal of Economic Perspectives 5(2) (Spring 1991), pp. 111–32.
3. China’s net private capital inflows were $8 billion in 1990. By 1999, China’s capital inflows had soared to $41 billion, more than ten times the amount of money attracted by Russia in that same year (World Bank, World Development Indicators 2001).
4. See, e.g. World Bank, World Development Report 1996: From Plan to Market (London and New York: Oxford University Press, June 1996).
5. The best defense that the radical reformers in Russia have of their failure is this: we do not know the counterfactual, what might otherwise have been. The options available in these other countries were simply not available. By the time the radical reformers had taken over, a centrally guided reform like the one in China was no longer possible, because central power in Russia had collapsed. The takeover of the enterprises by the nomenklatura, the existing managers, which occurred in many cases anyway, was the alternative. On the contrary, I would argue that a recognition of these problems made it even more important not to conduct the privatization and liberalization strategy in the way that it was done. The breakup of central power should have made it easier, and more important, to break up the large national enterprises, especially in natural resources, into competing parts, leading to greater diffusion of economic power. It made it more imperative to ensure that a working tax system was in place before the sources of revenue generation were given away. China’s reforms involved enormous devolution of economic decision making. The alternative strategies in the end might not have worked, but it is hard to believe that matters could have turned out worse.
CHAPTER 12
1. See S. Fischer, “On the Need for an International Lender of Last Resort,” Journal of Economic Perspectives 13 (1999), pp. 85–104. Fischer, like many others advocating the lender of last resort view, makes an analogy between the role of a central bank within a country and the role of the Fund among countries. But the analogy is deceptive. A lender of last resort is required domestically because of the first-come-first-served basis of deposits, which contribute to the possibility of runs—see D. Diamond and P. Dibvig, “Bank Runs, Deposit Insurance, and Liquidity,” Journal of Political Economy 91 (1983), pp. 401–19. And even then, it does not suffice to avoid runs, as the experience in the United States demonstrates forcefully. Only when accompanied by strong banking regulation and deposit insurance does a lender of last resort suffice to fend off runs. And no one—not even the most ardent supporters of the IMF—has advocated that it provides anything analogous to deposit insurance. Moreover, the rigidity with which the Fund has implemented many policies makes many countries wary of ceding to it much regulatory authority (even if the appropriate domain of regulatory authority could be defined, and even if issues of national sovereignty did not become paramount). It is worth noting that U.S. regulatory authorities have often argued that well-designed policies of forbearance are a critical part of macroeconomic management, while the IMF has typically argued against such forbearance. Elsewhere, I have argued that in doing so, the IMF has often failed to take account of the basic fallacy of composition: in the presence of systemic problems, the absence of forbearance may be self-defeating as each bank, unable to raise additional capital, calls in its loans, leading to more widespread defaults, and furthering the economic downturn.
2. What I call a “super-Chapter 11.” For details, see M. Miller and J. E. Stiglitz, “Bankruptcy Protection Against Macroeconomic Shocks: The Case for a ‘Super Chapter 11,’ ” World Bank Conference on Capital Flows, Financial Crises, and Policies, April 15, 1999; and J. E. Stiglitz, “Some Elementary Principles of Bankruptcy,” in Governance, Equity and Global Markets: Proceedings from the Annual Bank Conference on Development Economics in Europe, June 1999 (Paris: Conseil d’Analyse economique, 2000), pp. 605–20.
3. While it is hard to blame the crisis on lack of transparency, lack of transparency did have its cost. Once the crisis had occurred, the lack of information meant that creditors withdrew their funds from all borrowers regardless of quality. Creditors simply did not have the information with which to distinguish between good and bad borrowers.
CHAPTER 13
1. The term corporate governance refers to the laws that determine the rights of shareholders, including minority shareholders. With weak corporate governance, management may effectively steal from shareholders, and majority shareholders from minority shareholders.
2. World Bank studies, including those coauthored by my predecessor
as chief economist at the World Bank, Michael Bruno, formerly head of Israel’s Central Bank, helped provide the empirical validation of this perspective. See Michael Bruno and W. Easterly, “Inflation Crises and Long-run Growth,” Journal of Monetary Economics 41 (February 1998), pp. 3–26.
3. Economists have analyzed what the attributes of such goods are; they are goods for which the marginal costs of supplying the goods to an additional individual are small or zero, and for which the costs of excluding them from the benefits are large.
4. Economists have analyzed deeply why such markets may not exist, e.g., as a result of problems of information imperfections (information asymmetries), called adverse selection and moral hazard.
5. It was ironic that the calls for transparency were coming from the IMF, long criticized for its own lack of openness, and the U.S. Treasury, the most secretive agency of the U.S. government (where I saw that even the White House often had trouble extracting information about what they were up to).
6. The perception in some quarters is that those inside the country can decide on such issues as when the school year will begin and end.
7. The IMF’s position of institutional infallibility makes these changes in position particularly difficult. In this case, senior people could seemingly claim, trying to keep a straight face, that they had been warning of the risks associated with capital market liberalization for a long time. The assertion is at best disingenuous (and itself undermines the credibility of the institution). If they were aware of these risks, it makes their policy stances even more unforgivable. But to those who were subjected to their pressure, these concerns were at most minor caveats, matters to think about later; what they were told was to proceed, and to proceed rapidly, with liberalization.
8. As we noted in chapter 12, the multiple objectives—and the reluctance to discuss openly the tacit change in the mandate to reflect the interests of the financial community—led to many instances of intellectual incoherence; this in turn made coming up with coherent reforms more difficult.
9. As its name indicates, a contingent credit line provides credit automatically in certain contingencies, those associated with a crisis.
10. There were more profound problems. While a contingent credit line could make sure that some new funds were made available in the presence of a crisis, it could not prevent other short-term loans from not being rolled over; and the amount of exposure that the banks would be willing to take would presumably take into account the new loans that would be made under the contingent credit line facility. Thus there was a concern that the net supply of funds available in the event of a crisis might not be affected that much.
11. These provisions allow a creditor to demand payment under certain circumstances—generally precisely the circumstances in which other creditors are pulling back their money.
12. In Europe, a great deal of attention has focused on one particular tax proposal, the so-called Tobin Tax—on cross-border financial transactions. See, for instance, H. Williamson, “Köhler Says IMF Will Look Again at Tobin Tax,” Financial Times, September 10, 2001. There is now a large body of literature analyzing the tax theoretically and empirically. For an account of this literature, see the Web site www.ceedweb.org/iirp/biblio.htm. Interestingly, even the former Treasury secretary wrote an article that could be interpreted as supporting the principles underlying the tax—L. H. Summers and V. P. Summers, “When Financial Markets Work Too Well: A Cautious Case for a Securities Transactions Tax,” Journal of Financial Services Research 3 (1989), pp. 261–86. But there remain significant implementation problems, especially in a world in which the tax is not imposed universally and in which derivatives and other complicated financial instruments have become prevalent. See also J. E. Stiglitz, “Using Tax Policy to Curb Speculative Short-Term Trading,” Journal of Financial Services Research 3(2/3) (December 1989), pp. 101–15. For the original proposal, see J. Tobin, “A Proposal for International Monetary Reform,” Eastern Economic Journal 4 (1978), pp. 153–59, and B. Eichengreen, J. Tobin, and C. Wyplosz, “Two Cases for Sand in the Wheels of International Finance,” Economic Journal 105 (May 1995), pp. 162–72. In addition, see the collection of essays in M. ul Haq, I. Kaul, and I. Grunberg, eds., The Tobin Tax: Coping with Financial Volatility (London and New York: Oxford University Press, 1996).
13. Though in the aftermath of the East Asia crisis, these proposals received considerable attention, with the Argentine crisis, which involved public indebtedness, attention was switched to sovereign debt restructuring mechanisms—in spite of the fact that many of the recent crises have involved private not sovereign debt.
14. As we saw, opening up a country to foreign banks may not lead to more lending, especially to small and medium-sized domestic enterprises. Countries need to impose requirements, similar to those in America’s Community Reinvestment Act, to ensure that as they open their markets up, their small businesses are not starved of capital.
15. The debt crisis hit Argentina in 1981, Chile and Mexico in 1982, and Brazil in 1983. Output growth remained very slow throughout the remainder of the decade.
16. The reassessment (as we have noted) actually began earlier, under pressure from the Japanese, and was reflected in the Bank’s publication in 1993 of the landmark study, The East Asian Miracle: Economic Growth and Public Policy. The changes in thinking were reflected in the annual reports on development, called the World Development Report. For instance, the 1997 report reexamined the role of the state; the 1998 report focused on knowledge (including the importance of technology) and information (including the imperfections of markets associated with imperfect information); the 1999 and 2001 reports emphasized the role of institutions, not just policies; and the 2000 report took a much broader perspective on poverty.
17. Not surprisingly, the Bank still has not taken as seriously as it should the theoretical and empirical critiques of trade liberalization, such as that provided by F. Rodríguez and D. Rodrik, “Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence,” Ben Bernanke and Kenneth S. Rogoff, eds., in Macroeconomics Annual 2000 (Cambridge, MA: MIT Press for NBER, 2001). Whatever the intellectual merits of that position, it runs counter to the “official” position of the United States and other G-7 governments that trade is good.
18. There are many dimensions to this transformation—including the acceptance of change (recognizing that things do not have be done in the way they have been done for generations), of the basic tenets of science and the scientific way of thinking, of the willingness to accept the risks that are necessary for entrepreneurship. I am convinced that such changes, under the right circumstances, can occur in a relatively short span of time. For a more extensive articulation of this view of “development as transformation,” see J. E. Stiglitz, “Towards a New Paradigm for Development: Strategies, Policies and Processes,” 9th Raul Prebisch Lecture delivered at the Palais des Nations, Geneva, UNCTAD, October 19, 1998.
19. In several of the countries, debt service is more than a quarter of exports; in a couple, it is almost half.
20. Such debts are sometimes referred to as “odious debts.”
21. An important exception is Jim Wolfensohn, who has pushed cultural initiatives at the World Bank.
22. Recently, developing countries have been increasingly pushed to comply with standards (e.g., of banking) that they have played little part in setting. Indeed, this is often heralded as one of the few “achievements” of the efforts to reform the global economic architecture. Whatever good they may do to improve global economic stability, the way they have been brought about has engendered enormous resentment in the developing world.
AFTERWORD TO THE 2017 EDITION
1 A survey of nearly 50,000 people in 45 countries, conducted by WIN/Gallup International Association, found that Hillary Clinton would beat Donald Trump by a landslide in every country except Russia. “WIN/Gallup International’s Global Poll on the American Election” available at http://www.wingia.com/w
eb/files/richeditor/filemanager/WINGIA_Global_Poll_ on_US_Election_-_FINALIZED_Revised_Global_Press_Release.pdf.
2 I describe this in my book The Roaring Nineties, which was published in 2003, the year after GAID. My position on these issues was based, in part, on theoretical work I had done prior to moving to Washington, some of which was itself motivated by financial crises in the United States (the S&L bailout of 1989) and elsewhere. See, e.g., “The Role of the State in Financial Markets,” Proceedings of the World Bank Annual Conference on Development Economics (Washington, DC: World Bank, 1994), pp. 19–52; “Introduction: S&L Bailout,” in J. Barth and R. Brumbaugh, eds., The Reform of Federal Deposit Insurance: Disciplining the Government and Protecting Taxpayers (New York: HarperCollins, 1992), pp. 1–12; “Financial Restraint: Toward a New Paradigm,” with T. Hellmann and K. Murdock, in M. Aoki, H. Kim, and M. Okuna-Fujiwara, eds., The Role of Government in East Asian Economic Development (Oxford: Clarendon Press, 1997), pp. 163–207; and “Liberalization, Moral Hazard in Banking and Prudential Regulation: Are Capital Requirements Enough?” with T. Hellmann and K. Murdock, American Economic Review 90 (1) (March 2000), pp. 147–65.
Globalization and Its Discontents Revisited Page 58